Everything You Need to Know About HMO Mortgages in 2023

HMO Mortgages

You may have heard of the term ‘HMO’ more frequently lately, or sometimes it can be referred to as ‘house share’. HMO stands for ‘House in Multiple Occupation’ or ‘House with Multiple Occupants’ which is described as a home shared by more than one household and where there are common areas that are shared. This has become increasingly popular for landlords as a way to maximise their rental income by subdividing a large house or apartment and letting it out to more than one household as a way to create more tenancies, rather than conventionally letting the property to just one household. HMOs have been around for a long time, but new rules and regulations have been implemented to ensure landlords are following the guidance and making their property as safe as possible for their tenants. In this article, we take a deep dive into HMOs and getting an HMO mortgage. We will also try to answer the frequently asked questions such as:

What is an HMO?

What loans are considered HMO mortgages?

What are the HMO mortgage rates, and how do they differ from regular buy-to-let mortgages?

What are the advantages and challenges of investing in HMO Properties in the UK?

What are the steps included in such a mortgage application?

How to choose the right mortgage lender for such mortgages?

What are the major benefits of HMO mortgages?

What is an HMO?

A House in Multiple Occupation (HMO) is a property let to numerous tenants on separate tenancy agreements. Landlords are always striving for ways to increase their yield and the return on their investments. Therefore, HMO properties can be a lucrative way for a landlord to increase their rental income simply from having multiple tenants and charging them per room instead of charging one household to rent the whole property as a single let. The most frequent type of HMOs are shared housing, usually common for student lets and professional lets.

If a property has three tenants or more living there, forming more than one household with shared facilities between the tenants such as toilet, bathroom or kitchen, then this is classified as a house in multiple occupations (HMO). A large HMO is when there are 5 tenants or more forming more than one household in one home.

Rules and regulations have been changed and added over the years for landlords to meet certain standards and obligations. There are mandatory licenses from the government and local authorities, which needs to be approved and renewed every five years. Licenses are not just required per landlord but for every individual HMO property. Licenses may get rejected, and renting a property without a license is a serious offence and can face legal consequences. Appeals for rejected licenses can be made, and in some cases, you may be required to make changes to the property until it meets the standard required as per your local council’s requirements. In the past, HMOs were classified as a property with three or more storeys, but since 1st October 2018, this rule has been removed in England and Wales, leading to more properties being pushed into the HMO category.

Increased demand for rental properties and the ability to achieve a higher rental yield have encouraged landlords to invest in HMO properties. HMOs usually work out cheaper to rent than for tenants to rent a whole property on their own, which is a huge incentive for tenants, and bills are often included as part of their tenancy, such as gas, electricity, water and council tax.

What loans are considered HMO mortgages?

There are many types of HMO mortgages, and although every case is different and there are exceptions, most lenders do tend to prefer HMO mortgages for the borrower to have some experience in letting a property. The task of taking on multiple tenancies can be complicated, and not having experience in being a landlord can be risky.

A lot more laws and legislation have been introduced in recent years around HMOs in terms of how the property is looked after, licensing and facilities that need to be available for the health and well-being of the tenants, and these are all things that will be of interest to a lender. Along with the property itself, there may be other things to consider by a lender,, especially for apartments, such as access rights and its surroundings.

Most lenders tend to require borrowers to have a loan-to-value (LTV) ratio at a maximum of 75%, although there might be some cases where some lenders can increase it to 85%. A stress test may also be carried out, which can determine how much you can borrow per pound of rental income, although some lenders may assess this based on renting the property to one household rather than consider the rental income from individual separate tenancies of the HMO property. A specialist valuation process may be required by a lender to be carried out for HMO mortgages which may lead to higher associated fees.

Lenders tend to look at HMOs as specialist properties; therefore, interest rates for HMO loans can be higher than a mortgage for a normal residential let, although some lenders do offer competitive rates for smaller HMOs. Most landlords are not disincentivised by the higher interest rates since their rental income as an HMO will likely be greater than renting the property as a whole. It’s worth noting that not all standard buy-to-let lenders will also lend for HMOs mortgages as they see HMOs as a separate product which holds more risks and a greater level of management, so you may be required to look in the specialist market for a mortgage and may require you to apply through a mortgage broker.

What are the HMO mortgage rates, and how do they differ from regular buy-to-let mortgages?

HMO mortgage rates in the UK differ from regular buy-to-let mortgages due to the higher risk associated with HMO properties. The interest rates for HMO mortgages are generally higher than those for standard buy-to-let mortgages. This is because lenders perceive HMO properties as riskier investments due to the increased management required for tenants and potential void periods.

However, some lenders may offer lower HMO mortgage rates for properties that are in good condition, located in a desirable area, and have a reliable rental income stream. It’s also important to note that HMO mortgage rates can vary depending on the lender, loan-to-value ratio, and the borrower’s creditworthiness.

Overall, it’s important to shop around and compare HMO mortgage rates from different lenders to find the best deal for your investment property.

What are the advantages and challenges of investing in HMO Properties in the UK?

Pros of investing in such mortgages

Investing in HMO (Houses in Multiple Occupation) properties can offer several advantages, including higher rental yields and lower vacancy rates compared to traditional buy-to-let properties. However, there are also some challenges to consider, such as increased management requirements and stricter regulations.

One significant advantage of investing in HMO properties is the potential for higher rental yields. With multiple tenants paying rent, HMO properties can generate more income than traditional buy-to-let properties, making them an attractive investment option. Additionally, HMO properties typically have lower vacancy rates, as even if one tenant moves out, the remaining tenants continue to pay rent

Cons of investing in such mortgages

However, investing in HMO properties also presents some challenges. Managing multiple tenants can be more complex than managing a single tenant, and landlords must ensure that the property meets specific health and safety standards. Additionally, local councils may have stricter regulations in place for HMO properties, which can affect the property’s profitability.

HMO mortgages can help investors overcome some of the challenges of investing in HMO properties. By providing a specific type of financing tailored to HMO properties, investors can access the funding they need to purchase and manage these properties. With HMO mortgages, investors can finance properties that might not be eligible for traditional buy-to-let mortgages due to the increased management requirements.

Overall, investing in HMO properties can be a profitable venture, but it’s essential to understand the unique challenges and regulations associated with this type of property investment. HMO mortgages can help investors access the funding they need to make the most of this investment opportunity.

What are the steps involved in applying for an HMO mortgage?

If you are interested in applying for House in Multiple Occupation mortgages in the UK, here are the steps you will need to follow:

Check your eligibility

Before you start the application process, make sure you meet the lender’s eligibility criteria for an HMO mortgage. Typically, this will include having a good credit score, a stable income, and a suitable deposit. Additionally, lenders may have specific criteria for HMO properties, such as minimum room sizes and a maximum number of tenants.

Gather the required documentation

To apply for an HMO mortgage, you will need to provide documentation that proves your eligibility, income, and identity. This typically includes payslips, bank statementsA record of a borrower's financial transactions often requir..., ID, and proof of addressEvidence of a borrower's current address, such as a utility .... You may also need to provide documentation related to the HMO property, such as a tenancy agreement, a property valuation report, and an HMO license.

Shop around for the best deal

HMO mortgage rates and terms can vary significantly between lenders. It’s important to shop around and compare offers from different lenders to find the best deal for your circumstances.

Complete the application

Once you have found a suitable lender and gathered the required documentation, you can begin the application process. This typically involves completing an application form and submitting the required documentation. You may also need to pay an application fee and undergo a credit checkA check of a borrower's credit history, which is used by mor....

Wait for a decision

After you submit your application, the lender will review your documentation and assess your eligibility. They may contact you for additional information or clarification. Once the lender has made a decision, they will inform you of the outcome and provide details of the mortgage offer.

Complete the purchase

If your application is successful, you will need to complete the purchase of the HMO property. This involves exchanging contracts, paying the deposit and fees, and arranging for the transfer of ownership. The lender will provide the funds for the purchase, and you will be responsible for managing the HMO property and making the mortgage payments.

Overall, applying for an HMO mortgage requires careful preparation and research. By following these steps and working with a reputable broker, you can access the funding you need to invest in an HMO property and build your property portfolio.

How to choose the right mortgage lender for such mortgages?

When it comes to investing in an HMO (House in Multiple Occupations) property, securing the right mortgage deal is crucial. With the right lender and mortgage terms, you can access the funding you need to purchase and manage your property and maximize your returns. Here are some tips for choosing the right lender and getting the best HMO mortgage deal:

1. Do your research: Before you start applying for HMO mortgages, take the time to research different lenders and mortgage products. Look for lenders that specialize in HMO mortgages and have experience working with HMO investors. Additionally, compare interest rates, fees, and terms from different lenders to find the best deal for your circumstances.

2. Consider the lender’s criteria: Each lender will have its own eligibility criteria for HMO mortgages. Make sure you understand these criteria before applying, and check whether you meet them. This will help you avoid wasting time on applications that are unlikely to be successful.

3. Check the lender’s reputation: It’s important to work with a reputable lender when applying for an HMO mortgage. Look for lenders with a proven track record of working with HMO investors and providing good customer service. You can check the lender’s reputation by reading online reviews, checking their regulatory status, and speaking to other HMO investors.

4. Seek professional advice: If you’re new to HMO investing or have limited experience with mortgages, consider seeking professional advice from a financial advisor or mortgage broker. They can help you navigate the application process, compare different lenders, and negotiate better terms.

5. Prepare your documentation: To apply for an HMO mortgage, you will need to provide documentation that proves your eligibility, income, and identity. Make sure you have all the required documents ready before you start applying, as this can speed up the application process and increase your chances of success.

By following these tips, you can choose the right lender and secure the best HMO mortgage deal for your investment property. With the right funding and support, you can build a profitable HMO property portfolio and achieve your investment goals.

How is the HMO mortgage market affected by the Bank of England’s interest rate increases and inflation/energy costs, and what tips can help HMO investors become more lendable?

According to the source, the Bank of England’s decision to increase the base interest rate has caused an increase in the cost of most fixed and variable-rate mortgage deals. The latest Monetary Policy Committee meeting held on 3 February 2022 resulted in another increase, to 0.50%, due to surging inflation. This is the first back-to-back rate increase since 2004 and is expected to continue to rise throughout 2022. The availability of mortgages has continued to improve, with mortgage choice hitting a 13-year high, and the level of mortgage choice for landlords specifically had increased for the eighth consecutive month in January. HMO lending is back to pre-COVID criteria, and many lenders who exited the market during the pandemic have returned. Rising interest rates and increasing inflation and energy costs are having consequences on HMO performance. Inflation has surged to a 30-year high, and energy prices have risen significantly. To get in a super lendable position, HMO investors must make their credit score, deal analysis, and entire deal prospects as strong as possible, get into a position where they don’t need to borrow as much from the bank, understand what’s happening in the mortgage market, have the right mortgage broker on their team, and master the art of applying for HMO mortgages.

Next steps

HMO can cause some complications and seem complex when it comes to finding the right lender and you may require specialist lenders. Each lender may have different lending requirements and expectations from an application or a property. Contact us today if you want to know more information on HMOs and help find the right lender.